Gas price headache only just beginning

Households in Victoria, more reliant on gas than in NSW, will likely see $300 increases in their annual gas bills, lobby group Manufacturing Australia says.
Photo: John Woudstra

by
Angela Macdonald-Smith and Mathew Dunckley

The threatening gas supply crunch in NSW has rapidly become a problem for the rest of south-east Australia, with industrial customers and households in Victoria set to bear the brunt.

The combination of the start-up of huge liquefied natural gas export plants in Queensland and a stalling in the development of NSW’s own coal seam gas resources is set to take a heavy toll.

“If you’re living in Victoria and you think this isn’t a problem for you, it’s now become a problem for you," Jim Snow, a director at energy consultancy Oakley Greenwood, said. “The Sydney hub will set the gas price, not just for Sydney but probably for Melbourne and South Australia as well."

Gas prices were on the way up before the emergence of Queensland’s $70 billion LNG export industry, as the cost of supply projects increases to harvest gas from increasingly more hostile locations, most commentators say.

But years of delays in developing key coal seam gas projects in NSW have turned the screw, while demand in eastern Australia will treble by 2015 due to the LNG projects.

Households in Victoria, more reliant on gas than in NSW, will likely see $300 increases in their annual gas bills, lobby group Manufacturing Australia says. Oakley Greenwood calculates NSW household prices may rise 28 per cent in five years.

Particularly worried are industrial users of gas, already strained by the strong dollar and high wage costs.

“We’re in transition at the moment from domestic use only, to export and domestic use, and it has come with teething problems," MA chairwoman
Sue Morphet
said, pointing to the need for some of the LNG projects to buy more gas to meet their needs, eating into supplies expected to be available for local use.

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“If these problems are not resolved in some manner shortly, there will be thousands of jobs lost and this price spike may well be too prohibitive for many businesses to deal with."

Wholesale gas prices have surged from historic levels of $3.50-$4 a gigajoule into the $6 to $9 range. Some analysts expect prices to top $10 within three years before new fields start up.

NSW, which produces just 5 per cent of its own gas needs, is becoming more dependent on Victoria to meet demand, as confirmed by the haulage deal struck by
Origin Energy
and
APA Group
this week, which will increase pipeline capacity north into NSW.

“This is what price shocks do: they bring new development and investment in supply," Mr Snow said.

Studying the problem in Victoria is former federal minister
Peter Reith
, who is shortly due to present the recommendations of his review of the gas market to the Victorian government.

He is expected to urge opening up of unconventional gas fields to increase supply and competition to try to ward off spiralling prices.

He could also press for joint marketing arrangements for gas field developers to be unwound to give large customers more supply options.

“Market structure matters," one well-placed source said. That source predicted that rising gas prices would emerge in the political debate more strongly, potentially balancing concerns from opponents to development.

“All the political noise has been from the anti-CSG groups. The political noise from rising gas prices is just starting to build," the source said.

One industry observer, also speaking on the condition of anonymity, suggested gas was a potential headache for both the Coalition and Labor heading into the 2014 Victorian election.

This source predicted little tangible action ahead of that election but after the poll the imperative would be strong, he said.

“Whoever is in government post-2014 isn’t going to be able to sit back and watch prices go up," he said.

“We need more gas so we had better get it."

AGL Energy
, struggling to develop coal seam gas projects in NSW, sees the answer in supply. “One of the best ways to put downward pressure on gas prices is to ensure NSW develops its own gas reserves," a spokeswoman said.

But manufacturers want answers sooner. “No one likes to talk about the ‘reservation’ word but, trust me, if there’s no solution, there will be no other option," Ms Morphet said.